S&P could downgrade many covered bond programmes in Spain, Italy and Portugal, but upgrade some public sector programmes, after publishing updated criteria for rating single jurisdiction structured finance transactions above the sovereign yesterday (Thursday).

The methodology update come after a request for comment (RFC) in October 2013 and, according to S&P, will result in fewer downgrades than expected then because of changes made to the original proposals.

The rating agency noted that the updated framework aligns its approach with respect to rating securitisations above the sovereign in developed and developed markets.

“The criteria will have the greatest effect on securitisations in Europe because, with the application of the current EMU criteria, we currently have the largest rating differential between top-rated securitisations and sovereigns,” said S&P. “Compared to our current EMU criteria, we are reducing the maximum rating differential between sovereigns and most securitisations to four notches from five or six notches [unless the securitization meets certain conditions] due to our evolving views on the effect of country risk and related tail risk across asset classes.

“The final criteria also require a certain level of credit enhancement for ratings on securitisations to exceed the sovereign rating, which is in line with our view of the severe level of stress likely to accompany a hypothetical sovereign default scenario.”

S&P said that it expects 25%-40% of ratings on Spanish RMBS, ABS, covered bonds and multi-cédulas to be affected, with the expectation that they will be lowered two or three notches. It said that it expects to upgrade one Spanish public sector covered bond programmes.

Half of Italian CMBS and covered bonds could be affected, said S&P, with most of these lowered one to three notches. Regarding Portugal, S&P said it expects mortgage covered bond programmes to be lowered one notch and one public sector covered bond programme to be raise one notch.

Three French public sector programmes and one Belgian public sector covered bond programme are expected to be raised one notch, said S&P, as a result of an increase in the number of notches a security with high sensitivity to country risk can be rated above the sovereign.